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‘Inability to meet IMF targets may force domestic debt restructuring’

04 Nov 2022

 
  • Dr. Nishan says Govt. has not officially ruled out domestic restructuring
  • Adds Central Bank has not taken domestic debt off the table
  By Imesh Ranasinghe  Sri Lanka will have to opt for domestic debt restructuring if the Government cannot achieve the targets it has agreed upon with the International Monetary Fund (IMF) as the Government has not yet officially ruled out restructuring its domestic debt, Verité Research Director Dr. Nishan De Mel said. Speaking at an event held on Wednesday (2) with the participation of private sector officials, he said that if Sri Lanka is unable to meet the IMF targets, the IMF agreement would require that Sri Lanka will have to restructure domestic debt, if this is the only way of meeting the set targets. He noted that if one reads carefully into what the Central Bank has said, they have not taken the possibility of domestic debt restructure off the table. “But the perimeter of restructuring expands when you can’t meet the targets,” he added. Dr. De Mel said that the Government cannot achieve the set targets at the current level of refinancing domestic debt.  He noted that 77% of the Government’s interest payments are on domestic debt as of June 2022, where the Government is borrowing more to service its existing domestic debt.  According to Central Bank data, the stock of total domestic debt increased by Rs. 296 billion between the period of April-June, while it got rid of a large stock of domestic debt in real terms, by running very high levels of inflation. Dr. De Mel added that Sri Lanka should reprofile its domestic debt, because the country will be better off doing it sooner rather than later when a debt sustainability crisis arises, leading to haircuts.  In the statement released by the Finance Minister, the Government has explained to creditors at the investor presentation held in September that the perimeter to be considered for debt treatment will depend on the nature of the vulnerabilities identified in the debt sustainability analysis by the IMF, and on the nature and level of the debt sustainability targets that the IMF is asking Sri Lanka to reach in the context of the programme supported by the Extended Fund Facility (EFF). The Government said to the creditors that they have not yet precisely determined the perimeter that will be subject to debt treatment. Sri Lanka needs to achieve a primary surplus of 2.3% GDP by 2025, as per the staff-level agreement with the IMF, from the forecasted primary deficit of 4% for 2022.


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